Buy-to-let specialist lender Paragon Mortgages has launched its first ever range of ‘stepped’ loans alongside its revamped product range for individual landlords and limited companies.
The five-year fixed rate stepped products can either increase by 0.5 percentage points from 2.75 per cent to 4.75 per cent in the fifth year, or borrowers can opt for the reverse. Both options come with a 2 per cent product fee.
According to the lender, the new stepped fixed rate products are designed for landlords who want that extra level of financial planning.
Highlights of the new range also include a two-year fix at 3.65 per cent at 75 per cent loan-to-value (LTV) with a 1.50 per cent product fee. The five-year fixed rate equivalent is priced at 4.49 per cent and comes with a £995 fee.
The full product range includes trackers and fixed rates for a house in multiple occupation, multi-unit blocks and single, self-contained properties.
Last month, the lender announced an upgrade to its website to allow intermediaries to submit applications for limited company buy-to-let purchases online.
Provider view
John Heron, director of mortgages at Paragon Mortgages, said: “We know that landlords are looking at how they plan their finances for the future with the recent Government changes due for implementation over the coming months. With this in mind, we have completely refreshed our product range and included, for the first time, stepped fixed rate products.”
Adviser view
Alex Reynolds, a financial adviser with London-based Advies Private Clients, said: “There have been quite a few stepped products in the residential mortgage market. I have to say I am not a huge fan of them. I would ultimately average out the rate over the fixed period to determine whether it would be better for a client to get a fixed rate that remains the same throughout the period. I struggle to see why someone would want this type of product. I can see the rate increase option working for clients who receive incremental pay rises – they would be able to afford the higher rate at the end of the term.”
Mr Reynolds added: “The percentage fee model is not a problem. The adviser would work out the total cost of the loans, taking into account the rate of interest and the product fee so it does not really make a difference. A percentage fee could prove costly for high-value loans, while a fixed fee of, say £2,000, would hurt those looking to take out a low-value loan.”
Charges
The two-year and five-year fixes come with a 1.5 per cent and £995 product fee, respectively. The levy for both five-year stepped products is 2 per cent.
Verdict
Stepped loans could be seen as innovation for innovation’s sake. Landlords tend to be in a financially favourable position so there may be little need to spread cost. A traditional fixed rate product guarantees the interest rate for a pre-agreed period, so it enables people to budget effectively by being certain of how much they have to pay each month. The prospect of having to change the budget to accommodate for a hike in rates the following year might not appeal to many landlords. The reverse option makes more sense – those who can afford to pay a higher initial rate will find the repayment burden ease as the years progress. It will be interesting to see whether the lender will generate significant interest for the stepped products.
